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The Spy Chief's New Financial Power

June 04, 2006

The brief entry in the Federal Register, dated May 5, 2006, was opaque to the untrained eye. But the bureaucratic verbiage added up to this: President George W. Bush has bestowed on his intelligence czar, John D. Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from certain accounting and securities-disclosure obligations.

Unbeknownst to most of the financial world, Bush and every President since Jimmy Carter has had the authority under a 1977 statute to exempt companies working on secret defense projects from portions of the 1934 Securities Exchange Act. Administration officials told BusinessWeek they believe this is the first time a President has delegated that power to someone outside the Oval Office.

The timing of Bush's move is intriguing. On the same day the President signed the memo, Porter Goss resigned as director of the CIA amid criticism of ineffectiveness and poor morale at the agency. Only six days later, on May 11, USA Today reported that the National Security Agency had obtained millions of calling records of ordinary citizens provided by three major U.S. phone companies. Negroponte oversees both the CIA and NSA in his role as the Administration's top intelligence official.

White House spokeswoman Dana M. Perino said the timing of the May 5 Presidential memo had no significance. "There was nothing specific that prompted this memo," Perino said.

In addition to refusing to explain why Bush delegated this authority to Negroponte, the White House declined to say if Bush or Negroponte has exercised the authority and let a company avoid securities rules. Negroponte spokesman Carl Kropf said: "The ability to protect the confidentiality of some of these relationships with companies is important," declining further comment.

Jeffrey H. Smith, a former general counsel of the CIA, said a number of companies have been granted the waiver: "Pick any of the major defense contractors -- Lockheed (LMT), Boeing (BA), Raytheon (RTN). They do a lot of classified work for the government, and I know it's not all reported."

A spokesman for Lockheed Martin Corp. wouldn't confirm or deny the company has ever gotten a waiver but said Lockheed is "fully compliant" with all financial-disclosure requirements. Boeing Co. and Raytheon Co. declined comment.

Smith, now a partner at Washington law firm Arnold & Porter, added: "Some of [the contractors' work] is really black; that means really secret. Boeing might be building jet fighters for the federal government, but the building won't say Boeing on it. It will say something else. That type of thing you're not going to put in your SEC filings." Stressing that he isn't a securities lawyer, Smith said he believes defense contractors' revenue and costs still have "to be accounted for in some fashion."

By invoking national security, the government can use a number of other legal tools to keep corporate activity secret. The Bush Administration has employed the so-called state-secret privilege to seek dismissal of a pending private lawsuit in federal court in San Francisco concerning the relationship between the NSA and major phone companies. The Administration separately has asserted that secrecy provisions in the National Security Act of 1959 preclude an investigation of the NSA's dealings with the telecom industry.

The memo, published in the Federal Register on May 12, seven days after Bush signed it, had the unrevealing title "Assignment of Function Relating to Granting of Authority for Issuance of Certain Directives: Memorandum for the Director of National Intelligence."

In the document, Bush addressed Negroponte, saying: "I hereby assign to you the function of the President under section 13(b)(3)(A) of the Securities Exchange Act of 1934, as amended." A trip to the statute books shows that the act was amended in 1977 by the Foreign Corrupt Practices Act. The amended version states that "with respect to matters concerning the national security of the United States," the President may exempt companies from certain critical legal obligations. These include keeping accurate "books, records, and accounts" and maintaining "a system of internal accounting controls sufficient" to ensure the propriety of transactions and the preparation of financial statements in compliance with "generally accepted accounting principles."